I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

President Obama Was Right About Those Chinese Manufacturing Jobs: They're Never Coming Back

From the Presidential debate last night, something that President Obama said about all those manufacturing jobs that have been shifted off to China. You know the sort of thing, those assembly lines at Foxconn making stuff for Apple and Dell. They’re just not ever going to come back to the US those jobs. It’s possible that the manufacturing itself will but the jobs are gone, gone forever.

CROWLEY: Mr. President, we have a really short time for a quick discussion here.

iPad, the Macs, the iPhones, they are all manufactured in China. One of the major reasons is labor is so much cheaper here. How do you convince a great American company to bring that manufacturing back here?

Obama’s answer (in part) was this:

Candy, there are some jobs that are not going to come back. Because they are low wage, low skill jobs.

I’m not interested in the slightest about who won what. I’m a foreigner and American politics isn’t my subject. But that simple point about some of those offshored jobs is one I’ve made several times here. Worth pointing out again why those jobs are never coming back. And it’s nothing at all to do with corporate taxation, corporate greed, Chinese currency manipulation: it’s all entirely about the link between labour productivity and wages.

Imagine that we can have two ways of making iPhones and iPads. One way is to have huge numbers of people putting them together by hand. The other way is to use large amounts of machinery to do the work. There’s nothing either right or wrong about either way of doing it. And which gets used will depend upon the relative costs of machinery and labour.

We can imagine a world in which the machines to do the work cost $100 a piece (that is, that the cost of machinery per phone is $100) and lots of workers is $10 a phone. We can also imagine the reverse, where machinery costs $10 per phone and the labour $100. Which system we decide to actually use will depend upon those relative costs: for of course we’re going to sell more phones the cheaper they are, make more profit the lower we can get our costs.

Currently the system Apple uses is closer to the $10 of labour one. It’s actually around $8 or so that they spend on the assembly of an iPhone. And they do this because the cost of employing machinery to do this work would be higher. But let’s stick with our $10 just to keep the numbers the same.

Now, if we did that same work the same way in the US then that labour would cost more like the $100. If we used USA workers making the usual US wages and we got them to make the iPhone in exactly the same way it is done in China then it would cost up and around that $100 figure to do so (this is not an accurate figure but it’s good enough for our purposes here). Now we might rather like to have 250,000 jobs in the US paying good US wages to make iPhones. But it just isn’t going to happen: those jobs are never coming back. For the cost of using machinery to make them instead of people is lower than that $100.

It is true that we don’t actually know what the cost of automating the Foxconn assembly lines would be. But we can get a pretty good estimate. Or at least one that shows that it’s rather lower than the cost of employing US labour. Currently the standard Foxconn worker is making around $6,000 a year. This number has risen very strongly in recent years. It’s up from around $1,500 a year at the turn of the millennium (if anything, it has risen more than this). At standard US wage rates for electronic assembly a US worker makes around $27,000 a year. So, if labour productivity is the same in each place (which we are assuming it is, because we’re saying each will have the same amount of machinery and mechanisation) then clearly the US option is more expensive. But how can we tell that mechanisation is cheaper than using US workers? Quite simple really: Foxconn has already announced that it is going to install up to 1 million robots over the next three years. That’s one robot for each and every one of its current workers.

It is also proof that the turning point between employing people and employing machines is around and about that $6,000 a year. That’s the point at which you stop using labour to build things and start using machines to do so. You will note that this is well below the $27,000 necessary to employ US workers.

So, even if the manufacturing of Apple products were to return to the US there wouldn’t be those 250,000 jobs (roughly how many of Foxconn’s people work on Apple products) coming with them. There might be jobs for 250,000 robots but that’s not the same thing at all.

BTW, saying that US labour is more productive than Chinese therefore it won’t work this way is nonsense. For the reason US labour is more productive is because it uses more capital, more machinery. That is, the reason US labour is more productive is because there are more machines and fewer jobs. If you prefer, the reason the jobs won’t come back is precisely because US labour is more productive.

The numbers I’ve used here are only examples, they’re not the accurate costs at all. But the point being illustrated is still entirely true: those manufacturing jobs are not coming back to the US, just as the President said. The manufacturing could come back but even then the jobs wouldn’t. For there are two ways of making Apple products, the only two ways that anyone will use in the real world that is. One is to use 250,000 people to build them in China. The other is to use machines to build them in America. Our universe simply does not contain a viable alternative which uses 250,000 people being paid US wages to do the work.

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Offshoring and outsourcing have been happening for decades now and it has happened in a lot of countries on multiple continents. Exactly why does it take such a long time to put into print what is a rather abstute observation of the rather obvious? I have no problem with a US based company expanding into another countries to manufacture and bulid products in that geography that sell in that geography, but for a company like Apple, to outsource the manufacturing of their products to China because of cheaper prices, and then have them exported to China and sell them at prices like they were built in the US, I have a real issue with that. When we bought my wife a new car, we bought a Toyota Camry, one that was manufactured in the US by US workers for sale in the US market, I dont have a problem with that, Toyota expanded its market into the US and sells here. Apple on the other hand, a real piece of work and clever marketing, I will never as will millions of other Americans, never will buy or use Apple products because in the end, there are millions of Americans that still value their ethics over someone else’s profit margins.

So by your reasoning, it’s not appropriate that arid Saudi Arabia purchases food from the United States and Europe. Any food consumed in Saudi Arabia should be grown there. Is that it? Doesn’t matter that the cost would be 25 times what it costs to import food. They eat it, they should grow it. Let’s just throw out all economic theory.

So Apple and other U.S. tech companies should also throw out the laws of economics. Saudi Arabia, and even China, offshore agriculture as that makes sense given their needs and available land resources. We get a lot of those agricultural dollars. But we should not offshore tasks that make sense given our labor force and labor mobility constraints? I’m just not following your logic. Perhaps because you are not applying any.

Wel, I agree with your article and have been saying the same thing for years, just with an economy of words, as in, “We may someday assemble iPhones and other high tech products here in the U.S., but only when the cost of robotic assembly falls below the cost of Asian human labor. Those jobs aren’t coming back even if the manufacturing does.” So we’re in agreement on that point.

However, I object you your reference to Obama making this point without an attribution to Steve Jobs. After all, it was Obama who sat at a dinner with Jobs several years ago and asked him the same question and it was Steve Jobs who informed Obama that “those jobs aren’t coming back.”

These jobs are never coming back is a completely counter productive argument as are the assumptions made on the cost of automation. There is a highly technological complex opportunity to bring a lot of jobs back here to the Unites States. The FoxConn model isn’t sustainable and is starting to crack. It relies solely on buffering unskilled labor (hundreds of thousands) that live on the factory site…FoxConn city. Labor rates are rising, the willingness and supply of young people in the poor western agricultural region is diminishing, and the devices are getting too sophisticated to assemble by hand. The question is how do we start building Apple devices in the US? We have to be a whole lot smarter on how we design our factory of the future such that is automated, low cost, and is highly flexible. Believe it or not, this has already been done with of all things, socks. Check out WigWam in Sheboygan WI that makes all of their socks in the US and makes a lot of money. Your article and premise is off the mark because it misses completely the opportunity this country needs to jump on. It’s reminds me of Joeseph Kennedy and his defeatist attitude about Germany where he didn’t think we would ever match their ability to have the production output to make planes and tanks and guns. He was wrong. And so are you.

Yu missed the entire point. What you describe with sock manufacturing WILL occur with the manufacture of high tech electronics and other products Some of that will occur here in the U.S. (your sock manufacturing reference is an example of that) and some will occur in other countries (Foxconn is planning to do that in its factories). Cost/benefit analysis by each company and each product will drive when and where this happens. And when it does happen, the when and where will make very good economic sense, although those who blindly call for more U.S. manufacturing labor jobs will not see the logic and economic sense in it. That’s their issue.

In Apple’s case it isn’t about labor cost at all and never has been. It is about demand flexibility. Apple makes a high margin premium product and if you did a spreadsheet calculation of what it would take on a unit cost basis to make these devices in the US, Apple would still be making a huge amount of profit with their current pricing. But this isn’t what concerns Apple. It is the ability to instantly build a huge amount of units instantly and saturate their distribution channels instantly when they have a new product launch, where they have the flexibility to change the design at the last minute. Apple makes their devices in China because of the demand flexibility FoxConn can provide. The way Foxconn achieves this is by having a very large unskilled labor buffer where they job each worker does in the assembly is only a few steps where there is a trained supervisor of many steps for every four workers. This model isn’t sustainable for anyone including Foxconn. It is brutally inefficient. The trick and the opportunity is to figure out the scale and level of automation that can replicate a factory that can have the same amount of demand flexibility Apple feels they need. This is the opportunity. Rhetoric that is just about labor rate and saying these jobs are never coming back is completely defeatist and unproductive. Are we going to build our intellectual capital in manufacturing with the “just cause” of becoming the most efficient manufacturing country in the world? That is the point I am making and it is an important point people are missing. And it is fundamental to our economy and way of life.

“Are we going to build our intellectual capital in manufacturing with the “just cause” of becoming the most efficient manufacturing country in the world?”

But this is exactly the point that I am also making. The US is already the most efficient (hmm, perhaps Germany, but only maybe) manufacturing country in the world. That’s why there are so few jobs in US manufacturing: because everything is done efficiently by machines.

I am absolutely not arguing that production cannot come back to the US. I am however arguing that even if it does it’s not going to lead to a boom in jobs in manufacturing. Because, essentially, mass employment in manufacturing is going the way that mass employment in agriculture already has. It’s been automated.

That’s the reality that we need to get used to. Within another generation 90% of jobs are going to be in services.

Thank you for your comment and provocative article. And my apologies for not completely understanding what you were trying to convey. What these services would look like and do would be interesting, but I would hope to a large measure they support our ability to manufacture high complexity high margin products as well as design them considering supply, manufacturing, functionality, use, and new technology, etc… Should our services of being able to do such things be exported? Currently I think they are…but at too low of a price and in some instances almost for free.

You are proving out the point that businesses need to focus more on innovation and automation. The US has long enjoyed an entrepreneurial society and the next generation needs to focus on leveraging their inherent ability to develop newer, better, stronger, etc. products, services and business models. The jobs of the past are not coming back, but that does not preclude us from making our own jobs.

A manufacturer of electrical transformer core winding machines is utilising linear actuators from Schaeffler to ensure that sheet metal parts are handled and positioned with repeatable accuracy. The dynamic handling of transformer core sheets to repeatable jobs and more jobs in manufacturing especially. Quite the contrary of the Chinese jobs that President Obama referred to.